inston Churchill once said that if you put two economists in a room, you got two opinions, unless one of them was John Maynard Keynes, in which case you got three. So much the more striking is that when it comes to public spending on new infrastructure, almost all economists can agree on one thing: We need more of it. More investment is seen as the key to boosting economic growth and delivering the net-zero transition.
A pleasant consensus always makes my alarm bells ring, but in this case, it’s hard to disagree. The difficulty comes when trying to turn the high-level conclusion into detailed plans. How is it that a government that has delivered the largest investment budget in decades is being criticized for downgrading the second phase of HS2? And why does Sadiq Khan warn of a “doomsday scenario” for London, even though Crossrail is finally almost ready?
Let’s start with the facts. The government’s investment plans have been rising since 2010, with an acceleration over the last few years. Three consecutive chancellors – Philip Hammond, Sajid Javid and Rishi Sunak – have increased capital budgets dramatically, so that “public sector net investment” will be almost three percent of GDP in the foreseeable future. According to the independent Department of Fiscal Policy Studies, it is the highest level in decades and roughly double the average of the last 40 years.
The result is that the restriction on investment is no longer budgets, but getting the money out the door. Infrastructure projects need planning permission, a skilled workforce and high quality project management to deliver them on time. For years, the limit of the pace of railway improvements has been a lack of technical capacity and not money. All this is the reason why the Office of Budgetary Responsibility undertakes that 20% of the increase in capital expenditure announced in this Parliament will not be used. Some will no doubt argue that a record-breaking investment budget is still not big enough, but the more usable debate now does not throw around fantasy numbers; it’s about what can be delivered and value for money for taxpayers. This is the way to understand the series about HS2.
Why does a government that focused on leveling and announcing the largest strategic rail investment program in history end up disappointing the expectations built around the Leeds branch of HS2 and the Northern Powerhouse Rail project? The answer is that in any assessment of reasonable value for money, they perform much less well than the many minor local improvements chosen instead. Within the limits of what can be delivered, it was an economic no-brainer. These projects are not purely economic – they are enormously politically symbolic. Therefore, I suspect that the decision will be reconsidered in the coming years.
Some of these warnings sound like what the Treasury Department calls “bleeding bits” – worst case scenarios to build political pressure, but which will not actually happen. Like the RAF warning that the Red Arrows might have to go, or the BBC claims cuts will mean the end of CBeebies. But for Transport for London, there is an underlying truth: passenger numbers have fallen and are unlikely to recover from anything like pre-Covid trends. That means difficult negotiations to fill the budget gap with a mix of higher prices, lower spending and more support from national taxpayers. It also means that business cases for many future projects are no longer interconnected. Combine all this with the national focus on a level up and London will have to make some painful adjustments.
With fewer passengers and Crossrail online next year, the crunch for London’s transport infrastructure has been postponed, but a plan for the future is still needed. The north-south connection is poor, so how can projects like Crossrail 2 be kept alive? Creativity is required, especially over personal finance. Pension funds and international investors are queuing up to invest in infrastructure with strong business cases and CO2 profiles. If London wants to remain a global capital at an age of levels, it should start taking control of its own future.
Rupert Harrison is former Chairman of the Council of Economic Advisers and a multi-asset portfolio manager at BlackRock
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